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Kalkine Daily 15/09/2014 + TOLL

Sep 15, 2014


Stock of the Day – Toll Holdings (TOL)

Toll Holdings is Australasia’s largest provider of integrated third party logistics services. Toll’s scale, network and market share in Australia offers barriers to entry and a cost advantage in some segments. Toll’s operations are highly leveraged to domestic and regional economic conditions particularly in the retail and resource sectors .Weal economic conditions on the Australian east coast and aggressive price based competition in core markets have weighed on earnings in recent years.


Toll Resources Group EBITDA (Source – Company Reports)

Toll Holdings reports fiscal 2014 underlying net profit after tax or NPAT of AUD 298.5 million, 7% ahead of our AUD 280 million estimate. The strong NPAT result was due to a lower than expected average tax rate. The operating performance was in line with our expectations. The result highlighted the challenging domestic and international operating conditions facing Toll. Aggressive price based competition, subdued consumer demand, a cost focused customer base and slowing investment in the resource sector are all head winds to revenue growth and margin expansion.


Toll Resources Group Revenue (Source – Company Reports)

Despite a highly developed domestic network, Toll has not been able to establish a meaningful competitive advantage in key segments, particularly offshore. These factors and a large goodwill balance, continue to dampen group returns. We remain cautious on the prospects for a short to medium term recovery in the subdued macro-economic conditions a key driver of Toll volumes.


TOLL Daily Chart (Source – Thomson Reuters)
 
Given operating leverage across the business we do not expect a material improvement in EBITDA margins without a cyclical recovery in macroeconomic conditions. EBITDA margins were 8.2% in fiscal 2014, in line with the prior year. Flat margins are despite a wide ranging cost out program being implement across the business.  Cost savings of around AUD 100 million were delivered in Fiscal 2014 although this was unable to offset inflationary pressures with the underlying cost base rising 1.8% against the prior year. We believe the stock is expensive at its current price and would review the stock at a later date.
  

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